When I met recently with a senior investment officer from China Investment Corporation (“CIC”), the country’s sovereign wealth fund, I was told that CIC is very bullish on the United States. Why? In CIC’s opinion, the existence of large shale gas reserves in the U.S. will provide a massive shot in the arm for the country’s large but mature economy — kind of a modern-day energy equivalent to the deus ex machina in Greek literature.

If that is the case, then an equally bullish case can be made for China on the basis of its shale gas reserves alone. The U.S. Energy Information Administration estimates that China has total reserves of 1,275 trillion cubic feet of shale gas, almost 50 percent more than the 862 trillion cubic feet in the U.S., and more than that in the U.S. and Canada combined.

China’s most promising shale gas deposits lie in three giant basins: the Tarim Basin in the northwest, the Ordos Basin in north-central China (including Inner Mongolia), and the Sichuan Basin in the southwest. However, the only way to get to these reserves, which are embedded in shale deposits that can be anywhere from 8,000 to 21,000 feet below the surface, is by employing what is known as “hydraulic fracking” technology. Fracking refers to a procedure whereby fractures in rocks and rock formations are created by injecting fluid (typically water) into cracks to force them further open. The larger fissures then allow more oil and gas to flow out of the formation and into the wellbore, from where it can be extracted.

There are a number of very significant obstacles that stand in the way of China capitalizing on its large shale gas reserves. The first is water. China already faces a severe water shortage, and fracking requires large quantities. The second is the country’s lack of the pipeline structure necessary to transport gas from where it is found to China’s large population centers. The most critical obstacle of all, though, may be China’s lack of fracking technology.

Fracking has been developed over many years in the U.S., but China is only now trying to catch up. Despite the fact that China’s National Energy Administration has set ambitious goals of producing 230 billion cubic feet of shale gas annually by 2015, and at least 2.2 trillion cubic feet per year by 2020, the amount produced in China by the end of this decade will only be equal to about a quarter of America’s current production. Moreover, many industry experts believe that China will not reach these levels of production until 2030, ten years later.

Not surprisingly, the world’s largest energy companies are already active in China. Shell, which has teamed up with PetroChina, is investing $1 billion a year to tap into China’s vast basins of shale gas. Chevron recently formed a joint venture with the China National Petroleum Corporation, and has begun drilling exploratory wells in Sichuan. And Conoco Phillips — in a joint venture with Sinopec — announced in December that it plans to drill wells in Sichuan later this year.

In an effort to widen exploration and drilling activities, China’s Ministry of Land and Resources awarded exploration rights to 19 shale gas blocks, in a second round of bidding which started in September last year, to 16 companies, more than half of which have coal and mining backgrounds, but no experience in fracking. Each company will have three years for exploration and must start within six months of the award date.

Most of the second round winners are finding exploration and production very challenging due to the high drilling depths and tough operating conditions. As a result of their slow progress, a planned third round of shale gas bidding is likely to be delayed until the end of this year, or even 2014. Less than 10 fields will be offered in the third round, smaller than the number of blocks awarded in the second.

In the meantime, heavy air pollution in many of China’s major cities is causing city officials to accelerate the conversion of their vehicles from gasoline and diesel driven engines to those that use compressed natural gas (“CNG”) or liquefied natural gas (“LNG”). CNG is most suitable for taxis, while LNG is most suitable for trucks and buses.

Beijing, where the skies were so dark with pollution on many days this winter that flights had to be cancelled, recently announced plans to increase the number of taxis that run on natural gas from the current 99 to 2,000 by the end of July in a trial project to promote the use of clean energy in public transportation. Beijing now has 2,000 vehicles powered by natural gas, and that number is expected to increase to 10,000 by the end of 2013, according to the Beijing Environmental Protection Bureau. A total of 7,000 natural gas powered public buses alone will be put into service by the end of 2015, the bureau said.
According to Beijing officials, vehicles that use natural gas instead of gasoline can reduce pollutants with particulate matter with a diameter smaller than 2.5 micrometers by 93 percent; nitrogen monoxide by 20 to 40 percent; carbon dioxide by 25 percent; and carbon monoxide by 50 to 70 percent. Moreover, natural gas will cost 30 to 40 percent less than diesel fuel.

On an overall basis, natural gas accounts for only 5.7 percent of energy consumption in China, much lower than world average of 24 percent. China’s government expects to increase the rate to 10 percent by 2020, which will make China’s natural gas industry fertile ground for Chinese and Western companies with the technology and resources that can help the country to reach its goal.

One Response to “Shale Gas: China’s Untapped Resource”

Hi Jack,
In terms of the obstacles, I heard there is also a problem that the very high decline rates of shale gas wells require continuous inputs of capital and that actually pushes up the price of shale gas and might put the company deep in debt, e.g. Chesapeake Energy. So when the bubble bursts, there will be an energy crisis. Is this true?